The IRS introduced new partnership Schedules K-2 and K-3 for this tax year, and more recently issued additional guidance relating to them. The guidance is specific to the reporting of international tax related items on their returns. While determining if you will need to file these, you will need to consult with all partners to certify that certain information does not need to submitted for international tax related items (even if you yourself do not have any foreign activity)!
Who Will Need to File
Original instructions published by the IRS in September may have led many to believe that only partnerships who had foreign partners or international activities would be required to file the forms and provide them to equity holders. However, this is not what was reflected in the IRS’ original statement, as they added verbiage that suggested partnerships with no international activities and foreign partners will most likely need to file. A piece of the IRS’ verbiage is as follows:
“A partnership with no foreign source income, no assets generating foreign source income, and no foreign taxes paid or accrued may still need to report information on Schedules K-2 and K-3. For example, if the partner claims a credit for foreign taxes paid by the partner, the partner may need certain information from the partnership to complete Form 1116. Also, a partnership that has only domestic partners may still be required to complete Part IX when the partnership makes certain deductible payments to foreign related parties of its domestic partners. The information reported in Part IX will assist any domestic corporate partner in determining the amount of base erosion payments made through the partnership, and in determining if the partners are subject to the Base Erosion and Anti-Abuse Tax. See each part for applicability.”
With this being said, only individual partners will know if the partnership will need this information to prepare their returns. Additionally, unless all partners inform the partnership they will not need the information, the partnership should assume it will be required.
Why?
The new schedule K-2 & K-3 are intended to provide more transparency and clarity for calculating US income tax liability from relevant international items. The specific schedules are designed to replace the current reporting for these items, this way the information provided will be in a standardized format, with an additional level of detail.
Temporary Relief
With schedules K-2 & K-3 being brand new, the IRS included in notice 2021-39 that certain transition penalty relief for 2021 may be granted. It is important to note this will only be granted to those filers who made effort in good faith to comply with the new IRS reporting requirements.
More recently, however, on February 15th the IRS announced it would provide additional transition relief for this year only for certain domestic partnerships and S corporations. These entities would need to qualify by having no foreign activities, no foreign partners or shareholders, and no knowledge of partner’s or shareholder’s need for information on international items of relevance.
Wrap-Up
Filers first step should be to analyze and identify gaps between their current international-related information reporting procedure and the applicable additional requirements of schedule K-2 & K-3, this can be done with the help of your accountant/advisor. Additionally, once these gaps are determined, you may want to consider revamping your reporting procedures for obtaining the information.
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